The massive housing rescue package President George W. Bush signed last week creates one group of hidden winners: tax accountants and preparers.
The new law contains high profile help for home giants Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), for homeowners who took out mortgages they can't afford and for lenders who made doomed, poorly underwritten loans.
But it also has three less discussed tax provisions sure to complicate tax preparation (and record-keeping) for millions of ordinary taxpayers, while stimulating demand for professional tax help.
The first is an interest-free loan for first-time home buyers, which masquerades as a tax credit. The second is a one-year bump up in the standard deduction for existing homeowners. The third is a "revenue raiser" (meaning tax hike) which limits the capital gains tax break now available to taxpayers who convert a vacation home or rental property into their primary residence.
The "first-time home buyer credit" is a temporary refundable, repayable tax credit equal to 10% of the purchase price of a home, up to $7,500 for singles and married couples filing jointly. (Singles who buy a house together get only $3,750 each, as do married couples filing their tax returns separately.)
“Refundable” means you can get the credit even if you don’t owe $7,500 worth of income taxes, or any at all. Instead of reducing your income tax bill by $7,500, the government will cut you a check.
But the way the credit works, it’s actually more like an interest-free loan. Two years after you claim this credit, you have to start paying it back. The payback comes over 15 years in 15 equal installments--meaning you owe an extra $500 on your tax return each year. Sell your house, and you have to pay the rest back that year from your profits. (No profits, no pay back. Also, if you die, your heirs are off the hook.)
“It’s a credit with strings attached,” says Gregory Rosica, a tax partner at Ernst & Young in Tampa, Fla.
The fact that the credit is both refundable and repayable--a first--troubles Mark Luscombe, principal federal tax analyst for CCH, a Wolters Kluwer business. “People who don’t normally owe taxes will get a check from the government, and they might have great difficulty paying it back,” he says. “They might get [hit with] interest and penalties for failure to pay back this check they got.”
Exactly who qualifies for this credit? The definition of first-time home buyers is broad: someone who hasn’t owned a principal residence for the three years before. But the window for buying is narrow. You have to close on the house between April 9, 2008, and July 1, 2009. (Also, the IRS will disallow the credit if the taxpayer disposes of the residence--or the residence ceases to be the taxpayer’s principal residence--before the close of the tax year for which the credit would be allowed, either 2008 or 2009.)
You don't get the $7,500 at the time you close on a new house. So this won't really help a would-be home buyer who is having trouble coming up with the cash for a down payment. If you settle on a house in 2009, you can go back and file an amended 2008 return to claim the credit and get your cash sooner. (Yet more business for your accountant.)
This all assumes that your income is low enough to get the credit in the first place; as with most tax breaks these days, this one is denied to the better off. The allowed credit starts being reduced once a single has $75,000 of modified adjusted gross income, or once a couple has $150,000 of income. The credit goes away entirely at $95,000 for singles and $170,000 for couples.
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